Student Transportation Inc. (STB) is quite proud of its record of paying 100 consecutive dividends and its ongoing consolidation of the School Bus industry. Theoretically, the high dividend (currently over 8.5% annualized) is all the more attractive because of both its consistent payment and because it is earned in a recession-resistant industry. The Company missed no dividends during the latest recession and parents would rather forego school books to cut costs rather than to expose their children to the dangers walking to or from school.
STB Management has always focused on growing their business and the Panic of 2008 and subsequent declines in local tax revenues have encouraged local school boards to outsource their busing. The Founder and Chairman, Denis Gallagher, has proudly reported on the large number of accretive acquisitions and contract bidding competitions the company has won over the years. He has explained how STB often misses out on deals because they refuse to low-ball bid, requiring that new business be added in an accretive manner.
In the last year or so, a number of commentators have questioned the management, the business plan and the accounting of Student Transportation, sending the stock price down significantly. I watched this with distress because I dislike seeing shareholders impoverished. I decided that I would check how Student Transportation performed in their third quarter and decide whether they deserved to be on the road or in the Dog House.
When possible, I like to find simple ways to access whether Management is trustworthy and executing the business plan so that they achieve the goals of their shareholders. Here is how I convinced myself that Student Transportation needs to change if it is going to provide investors with a continuing stream of dividends that will grow from accretive acquisitions.
Point 1: Years of Accretive Acquisitions.
When STB Chairman Gallagher said in his May 10th Message to shareholders that, "On May 15th, 2013 we will deliver our 100th consecutive monthly dividend which is truly a celebration." he inadvertently presents us with a simple test of whether the many acquisitions and contract wins STB has had over the years have actually been "accretive".
Back in December 2007, when STB was still a "stapled" security (a hybrid of debt and common), the common share dividend was reduced to the US$ equivalent (which changes every month) of C$0.04636833. This monthly payout continued in 2008 and 2009, when the common shares were detached from the debt. Six years later, the company is still paying the same amount in each month (although the US$ amount varies a little each month because the exchange rate varies).
Even after winning a score of new contract bids and closing 14 "accretive" acquisitions since 2010, the monthly dividend rate has not increased.
If there are years of accretive acquisitions and a fixed dividend, either the business is not actually making more money or the business must be retaining more and more cash per share. But the debt has been increasing, when it has not been paid down with the proceeds of secondary share issues.
Through the first 9 months of the 2013 fiscal year, reported May 9th, there have been no acquisitions. Presumably this hiatus would allow acquisition-related soft-cost expenses to no longer interfere with the business track record, so let's take a simple look at operations in the current year to date.
Point 2: 9 month results 2012 versus 2013.
Not being part of company management looking for an increased salary and bonus for being in charge of a growing enterprise, I always focus on shareholder-friendly metrics. To me that means I look for changes in operations, on a "per share" basis. Student Transportation never gives the share counts in their Press Releases, like many companies. That always makes me suspicious that Management has diluted shareholders ownership in order to engineer what looks like progress, but is not. Let's look at the 2012 versus 2011 (9 month result) comparisons from STB:
The Increase in fully diluted, weighted shares outstanding between the end of Q3 for 2012 and 2013 was 25.2%.
The 25.2% increase in the weighted, fully diluted share count sets the benchmark for progress for the year over year comparisons. Anything less than an increase of 25.2% is a decline per share.
Year over year, in the most recent quarter (Q3), revenue increased only 6.4%. That is a large decline per share.
Year over year 9 month revenue increased only 13.5%. This too is a substantial decline in revenue per share.
If you read the May 9th report, you saw that the much of it was a long explanation why weather-related cancellations had reduced revenue in 2012 by $5 million and that this amount would be made up in the fourth quarter. In fact as Mr. Gallagher writes, weather-days happen every year and it is an unfair picture to ignore the missing revenue.
To be more than fair (since there were snow days in 2012 too), I recalculated the year-over-year revenue change with an extra $5 million in revenue added to the 9 month period in 2013. This adjustment made it as if there were no school days cancelled by storms and snow.
The year over year 9 month revenue, with an extra $5 million in 2012, increased by 15.4%. So, despite seven, supposedly accretive, acquisitions in 2012, most of which did not contribute earnings through the full 9 month period in 2012 (and should have fully contributed during the full 2013 period), revenues per share actually declined.
Point 3: maybe it is unfair to look at 9- instead of 12- month periods.
Perhaps something wonderful tends to happen in Q4 of Student Transportation's fiscal year, besides making up lost snow-days. Perhaps it is fairer to look at a full year over year comparison. The latest available, of course, is 2011 versus 2012. As a yield-oriented investor, as well as someone who provides yield-hounds with stock research, I like to focus on cash that is available to pay the dividend, like earnings.
Official net income in 2012 came in at $2.254 million, a 48.4% increase over what was reported in 2011.
With the increase in shares of "only" 14.3% in 2012, that looks like the acquisitions and new contracts are paying off.
That is, they look like they are paying off only if you look more closely at what they are declaring as income. Remember, we are only interested in cash income, This is the kind that can be paid to shareholders, pay off debt, or pay salaries.
In 2012 Student Transportation took almost $7 million into income from buying bus operations for less than they were worth. As a yield investor, that is not money I will see. That is some depreciating buses and buildings that are not going to get sold to pay my dividends, so those earnings don't accurately describe cash that can pay bills, payoff debt or be Cash Available for Distribution.
But to bend over backward to be fair, let's eliminate one-time items and try to get a handle on the busing business by considering the Operating Income after they pay the interest on their debt.
Operating Earnings after debt service in 2012 = -$1.113 million
Operating Earnings after debt service in 2011 = -$1.720 million
They can't pay any dividends from that, but to be kind we can see that they lost less money in 2012 than 2011.
Point 4: Where's Waldo (the cash).
The cash is in the non-cash charges to earnings.
a. Buses and offices give rise to lots of depreciation,
b. multiple acquisitions lead to lots of goodwill to write off for years,
c. STB's Canadex petroleum subsidiary provides them with depletion allowance to deduct from cash flow in calculating earnings.
In 2011, School Transportation had $35.283 million in DD&A. In 2012, they had $30.586 million.
That seems like a considerable sum when you compare these charges to the 2011 net of $1.5 million and the 2012 net of $2.25 million. Too bad their dividend liability exceeded their DD&A amounts in both years, $40,956 and 46.6 million in 2011 and 2012, respectively. Dividend liability is calculated by multiplying the yearly dividend by the weighted average diluted number of shares outstanding during the year.
As a yield investor I like to calculate their payout ratio and I find that in 2011 Student Transportation paid out 143% of the available DD&A and improved to 139% in 2012.
Anything over 100% means they don't have the money to pay.
Luckily for Student Transportation, enough shareholders opted for enrollment in their DRIP (dividend reinvestment plan) that it has reduced the cash needed to pay the dividends. Instead the DRIP allows STB to issue shares, causing shareholder ownership dilution instead.
Issuing treasury shares in lieu of cash dividends is the gift that keeps on taking. It reduces per share revenues and earnings year after year and helps make supposedly accretive acquisitions into losing propositions. Regrettably, Student Transportation is slowly coasting downhill because its per share performance suffers when it must finance both its business and its dividends.
I am guessing that a lot of investors on the Bus don't even know they are going downhill, or they might get off. To move ahead Student Transportation needs to become more profitable and/or reduce the dividends. Reducing debt would help too. If they had no debt from past expansion and borrowing to finance the dividend, the payout ratio would be less than 100%.
Bottom line is that Student Transportation needs an overhaul and some bodywork to become a business that is no longer slowly diluting its shareholders.
All data comes from Student Transportation filings and press releases available on their website, www.ridesta.com/